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New Power Fund Updated Commentary
May 29, 2008 - Stock market corrections are like a gift basket. Some would suggest the gift is right up there with our most cherished white elephant collections, but not me. I look at corrections as rich basket of temporary discounts and an opportunity to learn something about the character of our investment focus. The last 5 months of stock price action in the renewable energy sector has been an education to say the least. In retrospect, critical investors have been given an opportunity to understand which stocks and industry groups are our clear leaders, which should be kept on the “avoid” list as well identify a few candidates that might be qualify as good bottom fishing.
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As a reminder, I try write this column from the perspective of the investor. As far as I’m concerned there are just too many blogs and feeds out there pumping up this or that stock. But how much of that information is really practical to the guy who is trying to making money in the renewable energy/ clean tech world – and keep it! My interests as an investor and professional manager go beyond that. Not only am I looking for ways to generate a return in this sector but I want a relatively smooth, brain damage free experience along the way. A tall order indeed. So that, dear reader is the orientation of my commentary. Specifically, how do we invest in this cyclone of a sector without experiencing our own Myanmar? What underlying trends are in place that make our job easy or difficult and where are the best risk adjusted returns or low risk opportunities?
The Long Term Trend is Still Up
Renewable energy stocks have been around for quite a while but it wasn’t until 2005 that we began to see clean tech indices developed or exchange traded funds that we can use to identify overall sector trends. So using our short three year history as a basis for this observation, I think it is important to keep our eye on the longer term trends. As far as I’m concerned the trend in the renewable energy sector is still up despite the recent carnage in the first quarter (down over 35% on average for the sector). In fact the trend is strongly up showing an average annual return of 17% for the sector through the middle of May, 2008. With that said, our job is quite simple. We must stay diligent in our objectives and our commitment to this sector by staying invested as much as possible in the leading securities. Trying to time the sector as a whole is tough in terms of raising cash and guessing what’s going to happen next. Rather, the smart money recognizes the long term uptrend and accepts volatility as a cost of participation. When the long term trend turns down – and it will some day, then we can consider raising cash and becoming more defensive overall. Some would argue that the renewable energy sector still lives and dies with the broad US market. I can live with the idea that peaks and valleys might occur in the same time zones. However, in 2007 the PowerShares Clean Energy ETF (PBW) finished the year up 59% vs the S&P 500 around 5% with dividends. With that said, let’s talk about leadership. As I write the same Powershares ETF is still down 20% YTD after the first quarter drubbing. Our own “New Power” separate account strategy is also down on the year but only by half (-11%) net of all fees. Internally, we are not trying to game entry and exit as much as staying with the leadership on a monthly basis. Which brings me to my next point.
Follow the Leaders
Unfortunately, leadership in the renewable energy sector is still pretty dynamic. Last year’s winners are thus far this year’s losers in many industry groups. Solar is a good example. Big names like Sun Power (SPWR) and Evergreen Solar (ESLR) and Suntech Power (STP) and Gaiam (GAIA) made 140-250% in 2007 alone. This year, they have all been the hardest hit down 40-50%. I am beginning to find these names selectively attractive again as prices have come back to earth but we also have a new list of leaders that deserve our attention. Interestingly, many of the names in our new leaders category can be categorized as industrials in the electronic equipment and instruments. They say in a gold rush, one should sell shovels and I think that’s what we’re seeing. Companies like Capstone Turbine (CPST), Xide Technology (XIDE), Energy Conversion Devices (ENER), even our old friend Fuel Cell (FCEL) are all showing excellent gains on the year with heavy buying volume. These companies provide the necessary technologies that connect and facilitate the integration of renewable energy to traditional power use. In full disclosure, we own all of these names in our “New Power” portfolio. A few Solar companies like First Solar (FSLR) are also show good leadership but that Solar as an industry group is still just too popular for my liking as CNBC continues to run stories on “making money in Solar”. However, there is now a way to play solar with lower risk through a Solar ETF from Powershares (TAN). Leadership is also present in the materials, metals and mining stocks like Schnitzer Steel (SCHN) and the Sims Group (SMS).
Bottom Fishing
With the persistent selling in the last two quarters, there are a few names we might consider in our portfolios as a sort of bottom fishing exercise. Sometimes, there’s a lunker down there and it’s worth taking a chance even if you can’t clearly see a new uptrend emerging yet. Any positions taken in the bottom fishing camp should be kept very small with additions made only as the company rewards us to the upside. In this category, I tend to look for companies that are pure play in their industries with relatively little competition for investor dollars and trading at a deep discount. Gaiam (GAIA) is a risky buy at the moment but there aren’t many success stories in retail and this is one of them. GAIAM is a solid company which has been torn down artificially via their rather large stake in the failed IPO of Real Goods Solar, an installer of solar panels (RSOL). But now that both stocks have been hammered down in recent months, I look at a buy in GAIAM as a two for one opportunity. I think it’s also safe to start nibbling back into UltraLife Batteries (ULBI). Battery power and storage of energy is and will be a big theme in the future and their just aren’t too many ways investors can buy battery companies. The alternative to ULBI down 50% YTD is Valence Technologies (VLNC) up 97% YTD, so if you believe if buying low and selling high, one might consider Ultralife Batteries at this level. Finally, a bit outside the renewable energy box but still within the confines of Green living, I like United Natural Foods (UNFI) after the price has fallen over 45% since the last major peak in 2006. Natural foods distributors are here to stay and those that can do it for less like United Natural are going to be long term players.
Shameless Cheerleading
NEW YORK (MarketWatch) -- Exxon Mobil Corp. has cut funding to groups raising questions about climate change from human-generated carbon dioxide, May 28th, 2008.
I read this quote this morning and chuckled to myself. Exxon Mobile’s feeble attempt to even pretend they are pursuing alternative energy research is a bit like a 6 foot, 40 year old man showing up to your door on Halloween with a Scooby Doo mask. It’s just a little… weird. I guess they just took the mask off – surprise, we really don’t want to promote renewable energy says Exxon. Anyway, in sort of a sick way I find it comic to watch Exxon hit the self destruct button over and over again. A simple observation of their stock price which has been stuck around $90 for almost 12 months while the price of oil has risen 92%, speaks volumes to me. And this is all good news for the good guys (renewables). When oil prices finally give up this silly speculative frenzy and the prices of solar, wind, geothermal, wave power, clean tech and energy efficiency stocks continue to rise exponentially; we are going to witness a great awakening by Wall Street. OMG (That’s Oh My Gosh in textese) they will say, I guess this trend is real after all. Hold the line is my message through volatility, dissent and despair. Renewable energy is a new and very profitable industry for the world, like technology in the 80’s. And like tech, there were many times when even the lion hearted felt a bit weak but were ultimately rewarded for their bravery in 1000’s of percent returns. Smile at the sun and feel the power of a bright future on your face.
Sam Jones
Senior Portfolio Manager
New Power Fund
Website : www.NEWPOWERFUND.com
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